By now I’m sure you’ve heard about Warren Buffett paying a lower tax rate than his secretary. In fact, this was inspiration for the so-called Buffett Rule that was proposed back in 2011.

Under the Buffett Rule, a 30% minimum tax rate would be imposed on individuals earning more than a million dollars per year. That never happened, but the Bush era tax cuts were allowed to expire for high income earners as part of the fiscal cliff negotiations.

As a reminder, single filers with taxable income over $400k/year and joint filers with taxable income over $450k/year will be in a new 39.6% tax bracket (up from 35%). Also, long-term capital gains and qualified dividends will be taxed at a top marginal rate of 20% vs. 15%.

As I noted in my earlier post about the fiscal cliff deal, this 20% rate won’t apply to all capital gains and qualified dividends. Rather, it will just apply to the amounts that take a taxpayers income above the $400k/$450k threshold.

Unrelated to the fiscal cliff deal, high income households will also pay an extra 3.8% Medicare surcharge on net investment income to the extent that it pushes their total income above $200k/$250k for single/joint filers.

So surely Buffett is no longer paying taxes at a lower rate than his secretary, right? Well… No.

Because Buffett’s income is largely from investments, that top 39.6% tax bracket doesn’t really come into play. Yes, he’ll be paying more on his capital gains and qualified dividends, but that’s not enough to make up the difference.

And don’t forget the expiration of the payroll tax cut. This affects anyone with earned income, but it hits those in lower income brackets hardest. This is because Social Security taxes are capped.

This year, the Security Security portion of the payroll tax is only due on the first $113,700 of gross compensation. Beyond that, there’s no payroll tax obligation and thus no added hit thanks to the expiration of the cut.

According to a recent interview on CNBC, Buffett says that the net result is that “It’ll be closer [than it was in year’s past], but I’ll probably be the lowest paying taxpayer in the office.”

About the author:Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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Comments (scroll down to add your own):

when you say this:

“So surely Buffett is no longer paying less in taxes than his secretary, right? Well… No.”

You are being misleading, and I don’t know if it’s accidental, or on purpose. Warren will pay millions in taxes at a 20% capital gains rate and his secretary (who makes around 500,000 a year, poor thing) will probably pay less than 100,000 a year, with deductions and the like. As you are a proclaimed socialist, I understand that you are comfortable with taking more from the well to do, but please be honest. His secretary may pay a lower rate, but he will pay millions more, and contribute much more to the running of our government than she will.

I can’t fathom why people think its A-OK for the richest among us to pay 14.9% effective taxes or less while so many people below them in the middle class and upper income levels pay higher effective rates.

Its not socialism to say that progressive taxes should actually be progressive.

Its not as if Buffet has come up with a new idea here. His 30% tax rate is very similar to the ATM. Plus older politicans beat the same drum…

“We’re going to close the unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share, sometimes made it possible for millionaires to pay nothing, while a bus driver was paying 10 percent of his salary – and that’s crazy.”
— Ronald Reagan

I figure I am pretty average as far as income goes, married with one kid and making 60K, yet I only paid about 5.5% in federal taxes. Warren Buffet and Mitt Romney pay triple the rate I pay, and they definitely pay much higher amounts too.

The federal tax system is set up so that poor people pay nothing, middle class people don’t pay much, upper middle class people get hammered, and then very wealthy people pay moderate rates through capital gains.

Let’s assume I buy a share of stock for $100 in 1990. I sell that share of stock for $300 in 2012. My gain is $200 and my tax on that gain is 15% or $30. Assume that inflation from 1990 to 2012 has eroded my purchasing power so that I would need $180 dollars in 2012 to equal $100 in 1990. Therefore my inflation adjusted gain is $120 and my $30 tax is 25% and not really 15%. My point is twofold, one, capital gains are not always true income in inflation adjusted terms, and two, when discussing these tax situations, we hardly ever know enough information. My take on this: raise the top tax rate on dividends from 15%, which is really unfair, to at least 25%. Dividends are payable quarterly and in theory are not affected by inflation adjusted dollars. I also say raise the top capital gains rate to at least 20%.

In response to Jim, who “can’t fathom why people think its A-OK for the richest among us to pay 14.9% effective taxes or less while so many people below them in the middle class and upper income levels pay higher effective rates.”

I think it’s A-OK…and maybe if you stay with me for a moment, you might understand why:

The thing is, those middle class individuals are paying taxes on INCOME from working. Income that is pretty much guaranteed in exchange for your services provided to whomever you work for. Mr. Buffet’s “income” comes from investment, or CAPITAL GAINS. It is money that he has already made from somewhere else (and likely taxed on it already), and he has RISKED that money by essentially loaning it to a company (or trading w/ a shareholder of it) to allow that entity to develop new products, invest in new buildings, or do whatever to grow…or shrink.

Mr. Buffett has the potential to lose 100% of that money loaned away. You don’t with your income. There is a huge difference. You walk away with a steady paycheck while he may make no money at all. If he succeeds, he pays a LOWER CAPITAL GAINS TAX while you pay a higher INCOME tax.

To me, the lower tax rate encourages investment, which help grows the economy.

If both tax rates were equal, why would anyone risk investing their money for long periods of time? As Robert said above, inflation erodes the value of your investment gain anyway. If both tax rates were equal, you’d effectively end up paying more taxes more on your risky investment “loan” than your promised income.

Jim, you “can’t fathom why people think its A-OK for the richest among us to pay 14.9% effective taxes or less while so many people below them in the middle class and upper income levels pay higher effective rates.”?

Um. That’s because people below them in the middle class DO NOT pay higher effective tax rates.

Federal income tax is federal income tax–period. Most people pay very little to NOTHING in federal income tax. We’re in the 10th percentile of earners, and our effective tax rate was just below 10% last year. Why? Well, we have kids, a mortgage, we max out our 401(k), and we have lots of donations. (Our state taxes are lowered by our prepaid college trusts, which is another matter entirely.)

You are making the absurd mistake of thinking that your tax rate is the same as your marginal tax bracket. Ours is 28% this year. In fact, my income (I’m self-employed) will have a total tax burden of 48% on every single dollar I earn (28% fed, 5% state, 15% self-employment). That doesn’t mean that I’m paying 48% of our income in income taxes–much less federal income taxes. But it does mean that nearly half of every dollar I earn that I can’t shelter in a retirement account is going to be taken away.

John Clark is the only one who gets it. Stop taxing people who save and invest. They are the ones creating the jobs for all you socialist-communist whining fucks, by investing their hard-earned after-tax money in companies that create jobs. Yes, of course they pay dividends too. There has to be a reward for risking your lives earnings. Socialist pigs are not entitled to others savings and investments. Quit bitching about others success and get your sorry asses to work. Save and invest your own money for a change, and quit trying to steal it from others who do not owe you anything.

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